Understanding Supply in Economics

Hi everybody! What is supply in economics? Well before we go through this video make sure you've watched my video on demand. A lot of the concepts here are very similar, we're going to be talking about the same kind of things as we did before. So make sure you've watched that demand video first before watching this one. Supply is defined like this. It is the quantity of a good or service that producers are willing and able to produce at a given price in a given time period. Very similar to our demand definition with a few things changed. The concept of willingness and ability is there again, but now for producers. The law of supply now states that there is a direct relationship between price and quantity supplied, the opposite basically to our demand relationship. So direct relationship between price and quantity supplied. What does that mean? That means as the price increases, quantity supplied increases too. As the price decreases, quantity supplied decreases too. Direct relationship. Whichever way price is going, quantity supplied goes exactly the same way. We assume Cetris Paribus to get to the lower supply, to get to this supply theory. Now, just like with demand, we can indicate these movements in price on the supply curve itself. Now, the supply curve is drawn upward sloping because that indicates this direct relationship. As price goes up, quantity of supply goes up. So the supply curve is drawn upward sloping. Let's show these price increases and these price decreases on it to really indicate the lower supply. So we'll start with the price of P1 here. and that gives us a quantity supplied, let's call it Q1. So as the price increases, let's say from P1 to P2, you can see that quantity supplied has increased. Now we should know from the demand curve video that that is called an extension of supply. An extension of supply. So if supply increases by moving along the supply curve, that's called an extension. Just like when demand increased, when the price fell, that was called an extension of demand. Another name is an expansion. of supply if you want. Whereas when price decreases from P1 to P3 there is a reduction in supply but we know the technical term is a contraction of supply. So again, very importantly, to isolate this relationship, we assume setterist parameters. We let all other factors remain unchanged, remain equal. And that allows us to come up with this... isolated relationship between price and quantity supply. It allows us to come to the law of supply. And crucially, how do we illustrate the law of supply on a diagram? Well, we move along the supply curve. So when price changes, the price of a good or service itself changes. we move along the supply curve. If the price of a good or service goes up, we move up the supply curve. That's known as an extension of supply. If the price of a good or service decreases, we move down the supply curve. That's known as a contraction of supply. So when the price of a good or service changes, we move along the supply curve. Very similar concepts to when we studied demand and the demand curve. But the key question is why. Why is there a direct relationship between price and quantity supply? Why do producers supply more when the price goes up? Why is their willingness and ability greater to supply when the price is higher? Well, very simply, because of a profit motive that private producers have. Let's understand that by looking at price changes. Well, if the price goes up for a good or service, there is potentially more profit to be made if they can produce more and sell more. So there is a strong incentive when prices go up to produce more, to supply more. Well, that explains it, doesn't it? To make profit. If we go the other way, look on the x-axis here. Why, when quantity goes up, does it make profit? goes up, do suppliers want a higher price? Well, when quantity goes up, costs of production are going up, aren't they, for suppliers to produce those extra units. The costs are higher. Therefore, suppliers want a higher price to cover their costs of production to allow them to maintain their profit margins. So everything comes back to price. When prices are higher, there's more profit to be made if they produce more and sell more. If they produce more, they want higher prices to maintain their profit margins. So always think the reason that the supply curve is upward sloping. the reason for this direct relationship between price and quantity supply is the profit motive. And we've shown that when prices change, we move along the supply curve. We assume setter is parametrous to isolate that relationship. However, it's not just price that can affect supply. There are various non-price factors that can affect supply as well. Let's have a look at those. Well, just like with demand, non-price factors will shift the supply curve. So if non-price factors increase supply, the supply curve will shift to the right from S1 to S2. to S2, whereas if non-price factors reduce supply, the supply curve will shift to the left from S1 to S3. But crucially, this is all happening at the same price. So at the same price, supply is either increasing or decreasing. So you can see... Here, supply is increasing from Q1 to Q2 if supply shifts to the right, and decreasing from Q1 to Q3 if supply shifts to the left, but all at the same price, and let's call that price P1, in the market. So the question is, again, what are these non-price factors that can affect supply and therefore shift the supply curve? Well, a lot of these factors will affect costs of production. That's very important to remember as a generalisation. A lot of these non-price factors will change costs of production, and costs of production... production clearly will influence the willingness and the ability to supply. So if your costs of production are lower as a business, you're willing at the same price to supply more. Because actually if you supply that extra unit, reduction in cost means you can cover your costs of production at the same price easily. So you're willing to supply that extra output knowing that your costs can be covered because they're lower at the same price of P1. So basically a reduction in costs of production will shift the supply curve to the right, whereas an increase in costs of production will shift the supply curve left as producers are less willing and able to produce with higher costs of production at the same price. So can we be more specific now? What are we looking at? What are these specific non-price factors? Well, now remember, pints WC. This is a lovely memory device. Just think, when we drink loads of pints, right? Pints of water, I'll just give you a case. When we drink loads of pints, what do we need? We need the WC, don't we? We need to go to the loo. So just think, pints WC for all the shifters of supply. Happy days. So, what is P? P is productivity. Productivity of labour, productivity of capital, just productivity. So, what do we mean by productivity of labour? Well, that's the output per worker per time period, so maybe in an hour. If workers become more productive, they're producing more. They're being paid the same, but they're producing more in a given time period. That's going to reduce cost of production and shift the supply chain to the right from S1 to S2. Whereas if productivity of labour or productivity of capital reduces, cost of production... an increase because you're paying workers the same amount but they're producing less in a given time period, which will increase cost shifting supply to the left from S1 to S3. An indirect tax, basically a tax on production here that firms have to pay, will increase cost of production. So if an indirect tax has been implemented or has been increased, the supply curve will shift to the left from S1 to S3, whereas if an indirect tax has been reduced or taken away, cost of production will decrease and therefore the supply curve will shift to the right from S1 to S3. to S2. The number of firms, this one doesn't have anything to do with cost of production, this one is just as simple as it sounds. The more firms that enter the market, so the more firms that are in the market, the supply curve will shift to the right from S1 to S2, there will be more supply in the market now. Whereas the firms that leave the market, so there are less number of firms in the market, the supply curve will shift to the left from S1 to S3. Technology massively increases the willingness and ability to supply or decreases the... the willingness and ability to supply by affecting costs of production. There is a big link between technology and costs of production here. An improvement in technology reduces costs of production and shifts the supply curve to the right from S1 to S2, whereas if technology gets worse or becomes outdated, then the supply curve is going to shift to the left from S1 to S3. So technology is very important here. A subsidy. What is a subsidy? A subsidy is a money grant given by governments to producers to lower costs of production. of production and to encourage an increase in output. So if a subsidy is given or it's been increased in size, then the supply curve is going to shift to the right because costs of production have been lowered. Whereas if a subsidy has been taken away or has been decreased in size, costs of production for a firm are going to increase and the supply curve is going to shift to the left from S1 to S3. Weather, again this one doesn't necessarily have anything to do with costs of production. Good weather will allow supply to increase, or shift supply to the right. from S1 to S2. Now that could be excessive rainfall, that could be good weather, it could be excessive amounts of sunshine. Whatever that weather is which allows more supply will shift supply to the right. Whereas bad weather, whatever that weather might be, will shift the supply curve to the left from S1 to S3. And last one is a cheat. C stands for cost of production. That's a cheat, right? All the other factors that can affect cost of production. So things like transport cost, labour cost, the price of oil, because oil is often used in production for many different goods and services. raw material prices, utilities, so the price of gas, electricity, water, internet. We could even put rent in here if we wanted to. But also regulations, government regulations can increase costs of production. Things like health and safety standards, environmental policies. So think, if any of these things increase, then the supply curve is going to shift to the left from S1 to S3. If any of these things decrease in price or in cost, the supply curve is going to shift to the right from S1 to S2. So a bit of a cheat at the end. But it makes the point, doesn't it? So, you're thinking for general non-price factors that will affect supply, therefore shift the supply curve, generalise and think costs of production. Then remember Pines WC. I've put an asterisk, a star, next to all of the factors that clearly affect costs of production. It's only the number of firms and weather that don't directly affect costs of production here. Okay? So, non-price factors shift the curve. The price changing of the goods or services itself means we move along the supply curve. Very important you remember all of this. That is supply covered, the supply curve covered fully as well. Thank you so much for watching guys. Stay tuned for the very, very, very important next video where we look at equilibrium. I'll see you all then.

So make sure you've watched that demand video first before watching this one. Supply is defined like this. It is the quantity of a good or service that producers are willing and able to produce at a given price in a given time period.

Very similar to our demand definition with a few things changed. The concept of willingness and ability is there again, but now for producers. The law of supply now states that there is a direct relationship between price and quantity supplied, the opposite basically to our demand relationship.

So direct relationship between price and quantity supplied. What does that mean? That means as the price increases, quantity supplied increases too. As the price decreases, quantity supplied decreases too.

Direct relationship. Whichever way price is going, quantity supplied goes exactly the same way. We assume Cetris Paribus to get to the lower supply, to get to this supply theory.

Now, just like with demand, we can indicate these movements in price on the supply curve itself. Now, the supply curve is drawn upward sloping because that indicates this direct relationship. As price goes up, quantity of supply goes up. So the supply curve is drawn upward sloping.

Let's show these price increases and these price decreases on it to really indicate the lower supply. So we'll start with the price of P1 here. and that gives us a quantity supplied, let's call it Q1. So as the price increases, let's say from P1 to P2, you can see that quantity supplied has increased. Now we should know from the demand curve video that that is called an extension of supply.

An extension of supply. So if supply increases by moving along the supply curve, that's called an extension. Just like when demand increased, when the price fell, that was called an extension of demand. Another name is an expansion.

of supply if you want. Whereas when price decreases from P1 to P3 there is a reduction in supply but we know the technical term is a contraction of supply. So again, very importantly, to isolate this relationship, we assume setterist parameters. We let all other factors remain unchanged, remain equal. And that allows us to come up with this...

isolated relationship between price and quantity supply. It allows us to come to the law of supply. And crucially, how do we illustrate the law of supply on a diagram?

Well, we move along the supply curve. So when price changes, the price of a good or service itself changes. we move along the supply curve.

If the price of a good or service goes up, we move up the supply curve. That's known as an extension of supply. If the price of a good or service decreases, we move down the supply curve.

That's known as a contraction of supply. So when the price of a good or service changes, we move along the supply curve. Very similar concepts to when we studied demand and the demand curve. But the key question is why.

Why is there a direct relationship between price and quantity supply? Why do producers supply more when the price goes up? Why is their willingness and ability greater to supply when the price is higher? Well, very simply, because of a profit motive that private producers have. Let's understand that by looking at price changes.

Well, if the price goes up for a good or service, there is potentially more profit to be made if they can produce more and sell more. So there is a strong incentive when prices go up to produce more, to supply more. Well, that explains it, doesn't it?

To make profit. If we go the other way, look on the x-axis here. Why, when quantity goes up, does it make profit?

goes up, do suppliers want a higher price? Well, when quantity goes up, costs of production are going up, aren't they, for suppliers to produce those extra units. The costs are higher. Therefore, suppliers want a higher price to cover their costs of production to allow them to maintain their profit margins.

So everything comes back to price. When prices are higher, there's more profit to be made if they produce more and sell more. If they produce more, they want higher prices to maintain their profit margins.

So always think the reason that the supply curve is upward sloping. the reason for this direct relationship between price and quantity supply is the profit motive. And we've shown that when prices change, we move along the supply curve. We assume setter is parametrous to isolate that relationship.

However, it's not just price that can affect supply. There are various non-price factors that can affect supply as well. Let's have a look at those. Well, just like with demand, non-price factors will shift the supply curve.

So if non-price factors increase supply, the supply curve will shift to the right from S1 to S2. to S2, whereas if non-price factors reduce supply, the supply curve will shift to the left from S1 to S3. But crucially, this is all happening at the same price. So at the same price, supply is either increasing or decreasing. So you can see...

Here, supply is increasing from Q1 to Q2 if supply shifts to the right, and decreasing from Q1 to Q3 if supply shifts to the left, but all at the same price, and let's call that price P1, in the market. So the question is, again, what are these non-price factors that can affect supply and therefore shift the supply curve? Well, a lot of these factors will affect costs of production. That's very important to remember as a generalisation. A lot of these non-price factors will change costs of production, and costs of production...

production clearly will influence the willingness and the ability to supply. So if your costs of production are lower as a business, you're willing at the same price to supply more. Because actually if you supply that extra unit, reduction in cost means you can cover your costs of production at the same price easily.

So you're willing to supply that extra output knowing that your costs can be covered because they're lower at the same price of P1. So basically a reduction in costs of production will shift the supply curve to the right, whereas an increase in costs of production will shift the supply curve left as producers are less willing and able to produce with higher costs of production at the same price. So can we be more specific now? What are we looking at? What are these specific non-price factors?

Well, now remember, pints WC. This is a lovely memory device. Just think, when we drink loads of pints, right?

Pints of water, I'll just give you a case. When we drink loads of pints, what do we need? We need the WC, don't we?

We need to go to the loo. So just think, pints WC for all the shifters of supply. Happy days.

So, what is P? P is productivity. Productivity of labour, productivity of capital, just productivity. So, what do we mean by productivity of labour? Well, that's the output per worker per time period, so maybe in an hour.

If workers become more productive, they're producing more. They're being paid the same, but they're producing more in a given time period. That's going to reduce cost of production and shift the supply chain to the right from S1 to S2. Whereas if productivity of labour or productivity of capital reduces, cost of production...

an increase because you're paying workers the same amount but they're producing less in a given time period, which will increase cost shifting supply to the left from S1 to S3. An indirect tax, basically a tax on production here that firms have to pay, will increase cost of production. So if an indirect tax has been implemented or has been increased, the supply curve will shift to the left from S1 to S3, whereas if an indirect tax has been reduced or taken away, cost of production will decrease and therefore the supply curve will shift to the right from S1 to S3.

to S2. The number of firms, this one doesn't have anything to do with cost of production, this one is just as simple as it sounds. The more firms that enter the market, so the more firms that are in the market, the supply curve will shift to the right from S1 to S2, there will be more supply in the market now.

Whereas the firms that leave the market, so there are less number of firms in the market, the supply curve will shift to the left from S1 to S3. Technology massively increases the willingness and ability to supply or decreases the... the willingness and ability to supply by affecting costs of production. There is a big link between technology and costs of production here. An improvement in technology reduces costs of production and shifts the supply curve to the right from S1 to S2, whereas if technology gets worse or becomes outdated, then the supply curve is going to shift to the left from S1 to S3.

So technology is very important here. A subsidy. What is a subsidy? A subsidy is a money grant given by governments to producers to lower costs of production. of production and to encourage an increase in output.

So if a subsidy is given or it's been increased in size, then the supply curve is going to shift to the right because costs of production have been lowered. Whereas if a subsidy has been taken away or has been decreased in size, costs of production for a firm are going to increase and the supply curve is going to shift to the left from S1 to S3. Weather, again this one doesn't necessarily have anything to do with costs of production.

Good weather will allow supply to increase, or shift supply to the right. from S1 to S2. Now that could be excessive rainfall, that could be good weather, it could be excessive amounts of sunshine. Whatever that weather is which allows more supply will shift supply to the right.

Whereas bad weather, whatever that weather might be, will shift the supply curve to the left from S1 to S3. And last one is a cheat. C stands for cost of production.

That's a cheat, right? All the other factors that can affect cost of production. So things like transport cost, labour cost, the price of oil, because oil is often used in production for many different goods and services. raw material prices, utilities, so the price of gas, electricity, water, internet. We could even put rent in here if we wanted to.

But also regulations, government regulations can increase costs of production. Things like health and safety standards, environmental policies. So think, if any of these things increase, then the supply curve is going to shift to the left from S1 to S3. If any of these things decrease in price or in cost, the supply curve is going to shift to the right from S1 to S2. So a bit of a cheat at the end.

But it makes the point, doesn't it? So, you're thinking for general non-price factors that will affect supply, therefore shift the supply curve, generalise and think costs of production. Then remember Pines WC.

I've put an asterisk, a star, next to all of the factors that clearly affect costs of production. It's only the number of firms and weather that don't directly affect costs of production here. Okay? So, non-price factors shift the curve.

The price changing of the goods or services itself means we move along the supply curve. Very important you remember all of this. That is supply covered, the supply curve covered fully as well.

Thank you so much for watching guys. Stay tuned for the very, very, very important next video where we look at equilibrium. I'll see you all then.

Transcript for:Understanding Supply in Economics

Transcript for:
Understanding Supply in Economics